August 9, 2009

Real estate poll: Forecasting the housing-market bottom

I've been trying to avoid polls that ask you to get out your crystal ball, but hey -- since all the cool kids are talking about housing-market bottoms ...

It's really two questions: When will home sales stabilize, if they haven't already, and when will prices stop falling?

So, voilà -- two polls.

The first is about buying activity. Do you think home sales in the metro area have stopped falling, and if not, when? (Sales rose slightly in June vs. a year earlier, so you'll be opining on whether it's a trend or a blip.)

Comments

We have a long ways to go. Unemployment still has not peaked and foreclosures are still mounting. We have at least another two years of foreclosures as current foreclosures that are left intentionally off the market will eventually be auctioned or bought back by the bank to be held as inventory REO.

Not only will foreclosures and REO's increase when Alt A reset and Pay Option ARM recasts, but at some point interest rates will increase making housing affordability diminish. When rates go up, buying power goes down. The only way FREE MARKETS adjust is by value going down to compensate for higher payment. When the $8,000 tax break is expired, prices will fall further. Lending guidelines will continue to tighten up as more and more companies go belly up like the most recent Taylor, Beane & Whitaker who was the main source of funding for brokers. Less sources of funding and higher loan applications mean higher rates.

Many articles have come out that show 48% of homeowners will be underwater by 2011. That is a staggering statistic, considering that currently 28% of homeowners are underwater.

Calling the point where home sales stabilize is rather tricky. I think what you're seeing right now is a bull trap. It's not so apparent at the moment, but government interference in the foreclosure process has artificially limited the supply. Soon a whole new batch of foreclosures will hit the market and slow things down again. The game of chicken between buyers and sellers will return. Could sale quantities have stabilized this year? Maybe. It could very well be next year too.

As for the price declines, we've got a long road of those ahead. Credit is still being reduced, interest rates are rising or will rise, and foreclosures are still piling up at a rapid pace. Unemployment may have appeared to level off, but look into the numbers deeper to see that's not entirely true. People moving to this area for jobs are throwing a fit about how expensive things are here. I definitely see the 2 bottoms theory playing out.

Increased activity at the very low end of the market will distort the average but say little about the property value in other neighborhoods.

A phase out of the 8k tax credit might distort the number of condo sales, etc...

Some areas of the city seem like a ticking timebomb, while others seem more immune.

My criticism with all the forecasting has always been centered around sweeping generalizations that fail to account for anomolies, or try to relate disparate sets of data.

Lawrence Yun, however, seems to have eclipsed patrick.net by his greater interest in bringing nuance onto the table.

My prediction: places like Pigtown and Canton will drop substantially; places like Hampden will be virtually flat; places Ruxton will start to appreciate slightly more than CPI. And, of course, my house will triple every three years.

The only constant I can fathom is that people will choose good schools, safe neighborhoods, and respectable neighbors before favoring nightlife (or actually the ability to walk to nightlife).

If you would please indulge me in a couple of questions. I sincerely have been looking

1. Where is the evidnece of this shadow inventory? And how are they distributed?

2. How many people in those exotic mortgages have not refinanced? Do you have any evidence?

3. Now that so many brokers and small banks have gone belly up, how have the fees increased (other than $100 more for an appraisal)? Please provide specific evidnece. I don't think that they have gone up under the conditions we've already seen. Besides, if less people buy companies might be more inclined to reduce their fees to get business!

4. Aren't lending guidelines determined by FNM and FRE largely? How do you see them tightening? (Are you implying( which I agree with) that FHA loans are much too easy to get)?

5. The 28% stat is fallacious and the result of sloppy research. It does not account for the equity that people have paid down. The 48% stat assumes the same.

You are very determined to stand corrected. I have been in this business for over 10 years. I know how the mortgage and real estate market works.

If you want proof of shadow inventory, you will have to keep looking. The reason why it is called shadow inventory is because it is not accounted for. They are hiding it. A home is technically not in foreclosure until it has been filed. By not filing the foreclosure on a delinquent loan, they are keeping homes off the market. They are controlling the number of REO's and foreclosures so they can get more money on the property. Less supply raises prices. More supply lowers prices. It's simple economics. Not to mention, if prices continue to drop the homeowner will have less incentive to make payments and more incentive to walk away.

At least 70% of the exotic mortgages have not refinanced. They are just not able to qualify. They did high loan to value, stated income, investment property, negative amortization, etc. These are the most toxic that have yet to have their rates adjust on the 3/1, 5/1, or 7/1 ARM and recast on the Pay Option ARM will be coming very soon. These people don't stand a chance.

The problem is that the blame for the housing market is being put on the broker. When in reality, it was the lender and Wall Street who created these programs and did their own underwriting. Now that brokers are going out of business the end of the year when YSP is Prohibited and fees are capped at 1%, the lender will increase interest rates. More and more lenders will go belly up and this creates less available credit. When less credit is available, rates increase. When the Fed raises rates to control inflation, or when the Fed stops buying Mortgage Backed Securities, I can guarantee you rates are going MUCH HIGHER closer to 8% to 10%. There will be few banks left standing and the consumer will suffer having fewer choices to get a mortgage.

Fannie and Freddie determine if a loan is approved and/or eligible to be underwritten by the lender. The lender then sets their own guidelines and price adjustments. Credit score, loan purpose, loan to value, etc. will make the rate much higher after adjustments. FHA has no adjustments. Also, instead of putting down 20% you can put down 3.5%. You are most likely going to get a lower rate than going conventional. FHA loans are easier to get approved because there is no HVCC and borrowers do not have to come up with 20% for a down payment in a declining market. FHA loans are not "too easy to get". They have a minimum 620 credit score requirement just as Fannie and Freddie. Your assumptions are wrong.

The stat of underwater borrowers is pretty accurate. You are not realizing how many more properties were purchased during the boom than today. The majority of homeowners put very little down on their property when they bought at the peak. You also are failing to understand that when values fall from 20% year over year to 15% year over year that is not a bottom. That is a slower rate of decline. What you fail to realize is that Government intervention is not how you let the free markets work. By prolonging the process of foreclosures, you are going to see a slower rate of decline but over a longer period of time. Price declines have a long way to go. As more and more people are underwater, more and more people will walk away. Now they have studies that over 25% of the foreclosures are strategic.

I am not going to do your research and cite sources for you. That can be done on your own time. A good place to start is:
www.ml-implode.com

Jamie likes to ask the questions as though the Baltimore MSA (I just added MSA so all the arguments mixing City vs county get avoided too) existed independently of the rest of the country.

And there is a tendency in the responses here that often very well thought out arguments and interesting and insightful statistics use national numbers to describe a local condition or attempt to apply out local date to the national market. Neither one works well.

I can't fault Jamie for trying to limit the conversation more to local matters and impact but when so much of what happens locally is influenced by the rest of the country.. well it can get confused rather quickly.

Stating this without verifiable data is silly: I might as well say 70% have been refinanced and the other 30% have already gone through foreclosure and have since sold. Opinions and speculation are silly.

Historically and economically everything is cyclical and before the next cyclical turn is reached things must get worse, not better. Anyone who predicts our economic future on statistics should probably bet money on a baseball player's particular at bat, based on that baseball player's career statistics.

Who cares how low housing prices will go because if you are the average hardworking American (not a fly by night flipper) and your house value is below your mortgage amount, then you DONT SELL. And when enough people stop selling and a lot of people want to buy........values go up - cyclical change

if you are the average hardworking American ...and your house value is below your mortgage amount, then you DONT SELL...

or in 10,000 instances per day currently, you foreclose. This includes not only the financially strapped, but the financially savvy who just walk away from a decision that they now realize was very bad

You are correct. I am blinded by fear; looking for verifiable data, rather than agreeing to ad hoc speculation is an exercise in futility.

I herewith change my position: We will see 1979 (2nd quarter) prices before we hit 98.902% inflation because 83.9% of all homeowners will foreclose (that includes people who own their house free and clear). This is because there are 37.97 million homes on the shadow inventory and lenders will soon start charging 57% interest rates after 73.5% of the lenders go belly up. Once the 8k tax credit expires, oil will hit 5000 a barrel and everyone (and I mean EVERYONE) will begin to foreclose.

This is all extremely clear because we are already on this trajectory. That is how economics work!

The bottom is NOT close. We are only at 2003 prices: we have 24 more years left.

The only safe investments are guns and gold. I would also recommend moving to Greenland and buying an igloo with cash.

ah lil debbbie - you do see the light. Your trends in the last poat are all on the money, but your sarcasmically tainted numbers are obviously off. Greenland may even be theplace to be with global warming! (and on a personal note, I am for gun control to the max)

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About Jamie Smith Hopkins

Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
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